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Thursday, December 13, 2012

The Effects of Divorce on Estate Planning

Divorce is
frequently a difficult and painful experience for the parties involved. By the time the proceedings are complete, most people want to go
their separate ways and interact with their former spouse as little as possible.
Unfortunately, as with other major life events, divorce is also a time where it
is important to review and update an existing estate plan.

automatic
revocation of any potential disposition of property made by a divorced
individual to his or her former spouse as a beneficiary under a Will or Trust;

automatic
revocation of provisions conferring powers of appointment on the divorced
individual’s former spouse so that the former spouse can no longer appoint
beneficiaries under a Will or Trust; and

revocation
of any nominations of the divorced individual’s former spouse to serve in a
fiduciary or representative capacity rendering the former spouse unable to act
as Personal Representative or Trustee even though named in the document.

Additionally,
divorce severs interests of a former spouse in property held at the time of
divorce as joint tenants with rights of survivorship, and it is important to
retitle real estate following a divorce. While all of these changes result in a
change in the distribution of assets via estate plan documents, they do not negate
the documents themselves, therefore the documents continue to function and successor
beneficiaries, including minors, may become the primary beneficiaries because
of the divorce. If there are no successor beneficiaries, then the Intestacy
Statute dictates distribution of those assets.

Presuming that
successor beneficiaries are named, the change in beneficiary is important
because in many documents there is a presumption that should something happen
to the Grantor their now former spouse will receive such distributions and the
terms of the trust did not adequately provide for direct distribution to minor
children. Further, even when there is adequate provisions for maintain assets
in trust for minors, it is important to ensure that the trustee named to
administer that trust is a person the Grantor believes will look out for the
best interests of any children and ensure funds are available for their
long-term care. It is worth mentioning that a decree of divorce may contain
provisions requiring the inclusion of certain provisions in an estate plan,
including the purchase of life insurance to cover alimony or child support
payments should something happen to the Grantor. Failure to comply with such
requirements can have adverse consequences.

While a review of
the terms of the Trust, the beneficiaries, and the successor trustees is
important, it is just as it is important to ensure those individuals who are
designated to make decisions upon incapacity are also the people the Grantor
now wants to make decisions on their behalf. Many people execute Patient
Advocate Designations and Durable Powers of Attorney naming their spouses as
the sole designee to make decisions on their behalf. Following a divorce those
documents are revoked and the grantor is left without a designate to make
medical decisions. Even if those documents name other successor designee, it is
important to ensure that those individuals are still the best people to be
making decisions should the Grantor become incapacitated. Frequently successor
designee's are close friends of the couple, who may not continue to be actively
involved in their separate lives following a divorce.

As a side note, it
is important to remember that in addition to revoking all the above interests
held by former spouses, divorce also revokes interests held by former spouse’s
relatives. Thus if after a divorce an individual wishes to continue to leave
assets to a relative of the former spouse or name their former spouse’s
relatives as a designee, it is necessary to execute new documents reaffirming
that desire. While this may seem like an unlikely scenario, is important to
remember how many people meet their spouse through a friendship with siblings,
grow close to extended family during the course of a marriage, or feel that a
former spouse’s sibling or parent is still a good trustee for minor children.

Also related to
updating estate plan documents, is the importance of updating beneficiary designations of assets that transfer outside of the probate process. This
includes such assets as insurance policy proceeds and retirement benefits.
Updating beneficiary designations are important because these beneficiary
designations are a contractual agreement between parties, and divorce does not
negate such designations. It is possible for a former spouse to receive large
amounts of assets that the deceased certainly would rather have distributed to
the beneficiaries of their newly updated estate plan.

With all of the
changes following the dissolution of the marriage, the updating of an estate
plan can easily get lost in the shuffle. However due to the substantial impact
that a divorce has upon an estate plan, it is important to take the time to
review documents for necessary changes. When contemplating making changes be
sure to consult an attorney to ensure that changes are made properly.

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The contents of the blog are the thoughts and opinions of the authors. This blog should not be considered legal advice and does not create an attorney-client relationship. Each client's circumstances are unique and you should consult with a licensed attorney before taking any action.